January 31, 2024
How do FHA mortgages stack up to their conventional loan counterparts? Typical down payment issues are the most obvious comparison. The FHA has a 3.5% requirement, and conventional loan requirements vary. There are some important differences to know before you choose which mortgage loan is best for your needs.
FHA Loan Best Practices
FHA mortgages have two sets of rules. FHA loan program guidelines but also, lender standards like all mortgages. The FHA requires its participating lenders to keep policies that benefit the borrower. One example is the loan rule requiring ZERO penalties for early payoff of the loan.
Another perk? The option to refinance later with an FHA no-credit-check streamline refinance loan option. Not all borrowers may want this option (no cash out is allowed) depending on what kind of refinance is needed, but this is an option worth considering.
FHA loan rules limit costs passed on to the borrower. For example, a participating FHA lender can’t charge you for its own business expenses.
What kind of lender lawyer fees are one example.) Your lender or the seller also can’t compel you to buy a home that is appraised lower than the asking price.
Terms and conditions for conventional mortgages may vary depending on the lender, and/or state law.
FHA Loan Interest Rate Issues
Knowing how the FHA loan program works will help you understand why mortgage rates vary between conventional and FHA. is key to understanding this issue.
Why are FHA loans cheaper? In part because the government offers a guarantee to the lender to lower the risk of issuing the FHA loan. Lower risk, lower rate.
Conventional loans do not have any government guarantee. That is one reason for separate interest rate listings, one for conventional mortgages and another for government-backed home loans including FHA, VA, and USDA home loans.
Conventional lenders have elevated risk issuing mortgage loans than FHA lenders do and that can translate into higher mortgage loan rates for those transactions.
FHA Loan Credit Requirements
FICO scores are NOT the only criteria to approve or deny a mortgage, FHA loan or not. But government-backed home loan programs may allow applicants to qualify with ratios higher than those for conventional mortgages. Again, depending on the lender.
Some sources note that FHA loan approval may be possible for borrowers with debt ratios near 50%, depending on the lender. Conventional lenders may have different standards, approving applicants with debt ratios closer to 36% or better.
FHA Loans And Down Payment Assistance
There may be a state and local down payment assistance program offered in your housing market. Some affordable housing agencies and state government partnerships may provide downpayment help for a qualifying mortgage, and FHA purchase loans may be included.
You will need to know specific terms and conditions that qualify you for this help.
By that, we don’t mean to imply conventional loans lack similar options. Some don’t. However, other mortgage options don’t permit downpayment assistance programs to help the borrower.
Construction loans are a great example. Lenders offering single-close construction loans typically ask borrowers to provide their own downpayment funds because these loans have elevated risks for the lender.
Knowing your local options is important if you need downpayment help. Some borrowers mistakenly assume the FHA offers such help but that is not true, it’s administered by state or local programs in your area where available. Not all states offer the same type of help.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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